For many dazed investors, this is the worst market ever

Confused Main Street investors are starting to lose faith in Wall Street

Susan TomporKnight Ridder Newspapers

Published Saturday, June 15, 2002

During the past 30 years of investing, Peter Recker has never been so dumbfounded by the stock market as he is now.

By most accounts, things should be better. Stocks, after all, tend to soar a year or so after the Federal Reserve cuts interest rates. And the economy is moving out of a recession into a recovery mode.

But Recker, a Livonia, Mich., retiree who once was a steady stock trader, is so miffed by the market's moves that he hasn't bought or sold much stock since January.

"I'm in a holding pattern, a state of confusion," he said.

It is not just the economy that's leaving investors wondering which way to turn. It is Enron. It is Kmart. It is a host of e-mails from a well-watched Merrill Lynch stock analyst who publicly wove dot-com dreams while he privately scoffed at the same stock's silly prospects.

Main Street is losing faith in Wall Street. And while many still religiously invest in their 401(k) plans, they just don't have the zest -- or confidence -- in the market that they used to have.

"Can you really trust earnings reports? Can you really trust analysts? The markets have been losing the perception of legitimacy or at least trustworthiness," said J. Walker Smith, president of Yankelovich, a marketing and consulting firm in Chapel Hill, N.C.

Wall Street's woes come on top of fears of terrorism and unending war. Investment guru Warren Buffett even warned that a nuclear attack in this country is "virtually a certainty."

He had no idea when, saying it could be in the near future or decades away. But Buffett's words scared us, too.

Individual investors are asking: "Why in the heck would I want to invest in this market?" said Edward Eberle, president of Seizert Hershey & Co., an investment firm in Bloomfield Hills, Mich.

What's tough at the moment is getting beyond the moment.

Yet to survive, investors need to look beyond any economic blips or news of financial skullduggery. Think about the long haul. Money still is being made in stocks. But investors cannot afford to put all their money on just one strategy, such as a technology comeback.

It is the message of diversification that financial planners are hammering home again and again, as a way to calm frayed nerves and get investors back on track.

One thing is clear after the market fallout: It did pay to hedge your bets. You're probably more willing to sit it out and not make any rash moves if you didn't refinance your home, take cash out and throw every extra dollar you had into the ultrahot technology stocks of the 1990s.

Consider if you had sworn by the all-growth, all-the-time strategy at the market's peak in March 2000.

If you had invested $100,000 evenly in three tech-heavy Janus funds then -- the Janus fund, Janus Twenty and Janus Mercury -- you would have been left with only $61,780 as of May 2, according to a calculation by Morningstar Inc.

By contrast, you'd have $113,173 if you had spread the money among three very different funds and strategies -- the Janus fund, the Vanguard Total Bond Market Index and the T. Rowe Price Small-Cap Value.

Jeff Land, investment specialist for Charles Schwab in Novi, Mich., tells skittish investors that it's essential to look at the overall portfolio and not dwell on a few money-losing pieces.

Between Sept. 21, the market's bottom, and the May 8 rally, the median stock was up 25.1 percent. That's based on a basket of 6,731 stocks tracked by Ned Davis Research in Venice, Fla. By contrast, the Standard & Poor's index was up 12.7 percent.

"Times like this are why you want to diversify," said Sam Burns, research analyst for Ned Davis Research.

Historically, stocks tend to make more money over the long run than bonds or cash. And brokers are advising investors that it's important to invest in a wide range of styles -- small-company stocks, large companies, international funds. Most important, bad news doesn't go on forever.

"In 2005 or 2006, you'll look back and this will be a small blip in the 30-year chart of the market," said Trip Bosart, senior managing director for McDonald Investments in Birmingham, Mich.